Saving for Rainy Days Before They Happen
If your savings are low or nonexistent, your first step should be creating a rainy-day fund. This emergencies-only fund can help protect you from life’s unexpected turns and supply you with the money you need right away. For example, you might need your rainy-day fund to repair your car, pay unexpected medical bills or get you through a period of low income.
If you’ve ever been caught in a financial emergency with no rainy-day fund to bail you out, then you know how stressful and trying these times can be, as you work and hustle your way through paying an unexpected expense. If you haven’t, consider yourself lucky.
Essentially, a rainy-day fund protects you from the very worst financial times. It’s a vital necessity that will significantly improve your financial stability and give you peace of mind. Here are some tips to get you started saving for your rainy-day fund.
How Much Money Should You Put into a Rainy-Day Fund?
Everyone’s idea of a rainy day is different. The Federal Reserve Board’s 2021 report on the economic well-being of U.S. households found that 68% of respondents could cover a $400 emergency expense exclusively using cash. 20% of respondents reported having a major unexpected medical expense in the prior year between $1,000 and $1,999 on average. Thus, your rainy-day fund isn’t a fixed amount, but rather what you can afford to set aside, since you never know what will happen or how much it will cost.
Many people shape the size of their rainy-day fund based on what they are hoping to protect against. For example, if you’re worried about your job security or work in a profession where, if you lost your job, you could be looking for a new position for months, then you want a sizable fund. Some experts feel that a rainy-day fund should be able to cover six months’ worth of total expenses. Other rainy-day savers may only be looking to save a few thousand dollars to cover a car repair or another sizable cost.
How Do You Set up a Rainy-Day Fund?
The answer depends on a number of things like (once again) your financial situation, how large your rainy-day fund is and what you plan to use it for. If your rainy-day fund is only a few hundred dollars, you may decide to keep it somewhere safe at home, if reasonable. If you’re putting away money to cover a massive emergency, you may think about starting a separate bank account just for your rainy-day money.
Whatever the resting place for your rainy-day fund is, you need to make sure that the money is easily accessible. This is why some people go the “cash envelope under the mattress” route. If you want a little more security, many financial advisors will recommend a money market account or a regular savings account. You may be able to set up an alternate savings account with your regular bank. Some money market accounts allow you to write checks, which may make your rainy day fund a little more accessible. There are even apps for your smartphone that will help you allocate money specifically for a rainy-day fund.
Why Not Just Have One Savings Account?
Some people lump all of their savings into a single account, rather than distinguishing them from one another and placing them into separate accounts. They pull from this considerable amount of savings whenever the checking account gets low. The danger with this method is that your savings don’t have an intended purpose, so it’s simply used whenever extra money is needed. In other words, your Jamaican cruise vacation fund and emergency fund end up merging.
Without defined savings accounts or categories, it’s far easier to run low on money and be unprepared for an untimely emergency. Then, you have to resort to borrowing money to cover the expense. By setting aside savings into a separate emergency account, you’ll be much less likely to tap into it for something not so urgent.
Some people even create multiple rainy-day funds for different sized “emergencies.” They may keep a small bit of cash tucked inside Thomas Paine’s Common Sense for immediate and small financial obstacles, while also maintaining a larger safety net in the bank for more severe emergencies.
What Else Should I Know?
The last bit of advice: you should always be adding to your rainy-day fund, even when you feel you’ve built a large enough safety net for your worst possible financial nightmare. You never know what can happen that may lead you toward wishing you had more stashed away to cover yourself. It’s never a bad idea to invest in future peace of mind.